Macro-economics

Macro-economics is traditionally broken down
into macro-economic theory and macro-economic policy. Macro-economic theory involves the
construction and use of models of the whole, ‘macro’, economy.
Economists build such models so that they can explain the
structure of an economy, and the role and significance of the parts that make up this structure.
Macro-economic models also help the economist understand how the
separate components of the macro-economy are related.

Macro-economic models are also used to help
economists and policy makers make predictions, or forecasts, about the
economy, and about the effect of changes in one economic variable, such
as exchange rates, on other
variables, such as prices and output.

Macro-economic policy objectives

Macro-economic policy refers to how
governments and other policy makers compensate for
market
failures in order to improve economic performance and well-being.
Improvements in performance begin with the setting of policy
objectives, which
include
the achievement of sustainable
economic growth and
development,
stable prices and
full employment. Some
of the objectives set are potentially in conflict with each other, which
means that, in attempting to achieve one objective, another one is
‘sacrificed’. For example, in attempting to achieve full employment in
the short-term price inflation may occur in the longer
term.

Policy targets

In order to achieve policy objectives, policy makers
will set targets to aim for. Targets are often fixed, and
widely known, such as the current UK inflation target of 2%, but they
may also be flexible and less widely known, such as exchange rate and
employment targets.

Policy instruments

Once policy objectives and targets are established,
policy makers need to choose between alternative policy tools, or
instruments. These instruments are the levers of control of the
macro-economy and include monetary
instruments such as interest rates, and fiscal
instruments such as tax rates and government spending.

Policy disagreements

Policy disagreements occur for a number of reasons.
Macro-economic policy is often shaped by long held
normative
beliefs about what is essential, and this influences the choice of
model, objective, target, and instrument. For example, some
economists put the eradication of poverty
above the maximisation of corporate profits, and this will strongly
influence their belief about how the tax system
should be used. In addition, different economists may use
different economic models and forecasting techniques, and this may lead
them to disagree about the need for, size of, or timing of policy
changes.